With the extreme polarization of the geopolitical world, it is often difficult to discern between genuine technology threats, complete propaganda, and that murky gray area in between. Most Western observers assume that Chinese companies are unequivocally linked with the Chinese Communist Party (CCP), at least to some extent, and this presents both civilian and military concerns. But this assumption is not being received favorably, and one Chinese tech company is now fighting back in court after the Pentagon designated it as a military organization. According to this Chinese company, the allegations are completely false, and they have no ties whatsoever with the Chinese armed forces. This lawsuit raises more far-reaching questions about the inherent political ties of Chinese companies. Are all of these organizations connected with the CCP? Or do many Chinese tech companies have no association with the ruling regime whatsoever? How do you deal with allegations of military links and espionage when running a tech company in the United States?

Pentagon Classifies Multiple Chinese Companies as “Military” Organizations

As part of ongoing tensions with China, the Pentagon classified over a dozen Chinese tech companies as “military companies” in February of 2024. These include some of the biggest names in the Chinese tech world – including chipmakers, AI companies, drone manufacturers, and even organizations reportedly engaged in genetic engineering. The Pentagon stated that all of these companies represent a national security risk to the United States. 

So, what does this actually mean? What happens to a Chinese company after they have been added to the dreaded “1260H List?” First of all, the company can still operate within the United States. These companies are not banned outright, but they encounter a number of other consequences. First and foremost, they are automatically ineligible to bid for Defense Department contracts. They may also be “blacklisted” by the US Treasury Department, although it is not exactly clear what that would entail. 

Furthermore, a Chinese military company cannot receive any US investment. This could prove to be a major challenge moving forward for these companies, as the United States is home to some of the most lucrative investment sources in the world. 

Hesai Fights Back in Court

One of these Chinese tech companies has decided to fight back against its new military label. This company is none other than Hesai, a Chinese “lidar” startup that argues it has absolutely nothing to do with the military – and that any such allegations are completely meritless. It also points out that the Pentagon did not give any explanation or justification for its new label, and it failed to establish these links with any degree of clarity. If a lawsuit proceeds, the Pentagon may suddenly be forced to prove these links with a preponderance of evidence. 

Broadly speaking, all of the companies added to the 1260H list were engaged in the development of “dual-use” technologies that could have both civilian and military applications. Lidar is a relatively new laser-sensor technology that has a wide range of potential applications. Average Americans may remember headlines boasting of lidar’s ability to detect ancient ruins underneath the sprawling Amazon jungle – ruins that archaeologists were completely unaware of. 

It does not take a genius to imagine how this technology might be beneficial on the modern battlefield. Various companies have already demonstrated lidar’s ability to detect all kinds of ground-based targets. These include not only armored vehicles but also very small landmines. In 2023, James Madison University demonstrated how lidar can detect hidden bunkers, trenches, and other defensive positions that might be carefully hidden from view. Normal satellite surveillance may otherwise fail to detect these structures. The Ukraine war has shown a surprising return to trench warfare on a scale not seen since the First World War and the United States makes liberal use of hardened bunkers on the battlefield. 

Could Hesai be actively engaged in developing these military lidar systems for potential use against the United States? That is certainly a possibility, but it has not yet been explored in detail (or in court). If the Pentagon has access to evidence that establishes Hesai’s military ties, it has not yet revealed them to the public. Perhaps it does not intend to, and perhaps it will never publish its knowledge from covert sources. If a lawsuit moves ahead, however, some of this evidence may come to light. 

Does the CCP Control All Chinese Companies?

China operates an economy that is similar to that of the United States in some ways and yet markedly different in others. Some companies are “State-Owned Enterprises” (SOEs), while others are wholly privately owned. It seems that 100% private ownership is especially common among Chinese tech companies. That being said, some believe that CCP “cells” exist within every major Chinese corporation, and these alleged cells are said to exert considerable influence over corporate operations. As with many aspects of the Chinese economy, it is difficult to discern the truth from both Western and CCP-sponsored propaganda. 

What Happens Next for Hesai?

Hesai may be telling the truth. It is a relatively small tech startup, and the company issued a press release highlighting the fact that it is publicly traded on the Nasdaq with an independent corporate governance structure. Hesai officials also point out that all of its lidar products have EAR99 status under the US Department of Commerce – suggesting that this tech is only suitable for civilian applications. 

If nothing else, this story illustrates how military allegations can affect tech companies around the world. After its inclusion on the Pentagon’s list, Hesai’s share price plunged 80%. Clearly, they have a vested interest in addressing this concern – and they may have the opportunity to do so in court with help from experienced technology lawyers. 

Find an Experienced Technology Lawyer

If you have been searching for a qualified technology lawyer, look no further than John P. O’Brien. While founders and CEOs may run into several legal issues when running virtually any tech company, these challenges can become even more troubling when the military is involved. Perhaps your tech company is seeking military contracts, and you are trying to navigate the dizzying US military regulations regarding secrecy and compliance. Perhaps your company has been wrongly accused of having military ties, and these false allegations are affecting your ability to do business in the United States. Whatever the case may be, it makes sense to work with a lawyer who focuses entirely on technology-related legal issues. Reach out today to discuss your situation in more detail during a consultation.